Are we seeing the emergence of more White Swan events?
Exploiting new challenges in Enterprise Risk Management
By Geary W. Sikich – Copyright© Geary W. Sikich 2010. World rights reserved. Published with permission of the author.
Black Swans, Grey Swans, White Swans…
We hear a lot about things that are being called “Black Swans” today thanks to Nassim Taleb and his
extremely successful book, “The Black Swan: The Impact of the Highly Improbable,” now in its second
edition. I have written several articles centering on the “Black Swan” phenomenon; defending,
clarifying and analyzing the nature of “Black Swan” events. And, I am finding that wildly improbable
events are becoming perfectly routine events.
What this means is that businesses and governments need to be even more vigilant in their
prosecution of enterprise risk management initiatives. Private and Public Sector operations are
complex and becoming more complex as more entrants to the global marketplace compete for fewer
and fewer available resources at an ever quickening pace.
So, is society, as we know it, on the verge of collapse, destruction, another stone-age? Seems that
you cannot turn on a television, radio or the plethora of personal communication devices available
without headlines screaming at you about people with Molotov cocktails, car bombs, murders, floods,
fires, car crashes, riots and, celebrities gone wrong. Sovereign nations are going bankrupt, sabers are
being rattled; how you might ask, is it all going to end?
Question # 1: How much would you be willing to pay to eliminate a 1/2,500 chance
of immediate death?
I ask this question as a simple way to get an understanding of where your perception of risk is coming
from. Is it logical and rational or is it emotional and intuitive? Ponder the question as you read the
rest of this piece.
What exactly are all these swans and what do they mean?
Nassim Taleb provides the answer for one of the Swans in his book “The Black Swan: The Impact of
the Highly Improbable.” He states that a Black Swan Event is:
A black swan is a highly improbable event with three principal characteristics: it is
unpredictable; it carries a massive impact; and, after the fact, we concoct an explanation that
makes it appear less random, and more predictable, than it was.
Taleb continues by recognizing what he terms the problem –
“Lack of knowledge when it comes to rare events with serious consequences.”
The above definition and the recognized problem are cornerstones to the argument for a serious
concern regarding how risk management is currently practiced. However, before we go too far in our
discussion, let us define what the other two swans look like.
A grey swan is a highly probable event with three principal characteristics: it is predictable; it
carries an impact that can easily cascade; and, after the fact, we concoct an explanation that
recognizes the probability of occurrence, but shifts the focus to errors in judgment or some
other human form of causation.
I suggest that we tend to phrase the problem thus –
“Lack of judgment when it comes to high probability events that have the potential to
cascade.”
Copyright 2010, Geary W. Sikich and Logical Management Systems, Corp., all rights reserved.
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Are we seeing the emergence of more White Swan events?
Exploiting new challenges in Enterprise Risk Management
By Geary W. Sikich – Copyright© Geary W. Sikich 2010. World rights reserved. Published with permission of the author.
Now for the “White Swan”
A white swan is a highly certain event with three principal characteristics: it is certain; it
carries an impact that can easily be estimated; and, after the fact, we concoct an explanation
that recognizes the certainty of occurrence, but again, shifts the focus to errors in judgment or
some other human form of causation.
I suggest that we tend to phrase the problem thus –
“Ineptness and incompetence when it comes to certainty events and their effects.”
The table below sums up the categorization of the three swan events.
Uncertainty to
Certainty
Black Swan Event:
Highly improbable
Grey Swan Event:
High probability
White Swan Event:
High certainty
3 principal characteristics:
 Unpredictable
 Massive impact
 After the fact, explained
to appear less random
and more predictable.
3 principal characteristics:
 Predictable
 Impact can easily
cascade
 After the fact, shifts
focus to errors in
judgment or some
other human form of
causation.
3 principal characteristics:
 Certainty
 Impact easily estimated
 After the fact
explanation shifts the
focus to errors in
judgment or some other
human form of
causation.
Taleb uses the example of the recent financial crash as a “White Swan” event. In a video about risk
and robustness, Taleb talks with James Surowiecki of the New Yorker, about the causes of the 2008
financial crisis and the future of the U.S. and by default the global economy. A link to the video
follows: http://link.brightcove.com/services/player/bcpid1827871374?bctid=90038921001
More “White Swans” does not mean full speed ahead
Risk is complex. When risk is being explained, we often have difficulty listening and comprehending
the words used in the explanation. Why? The rather simple explanation is: compelling stories are
most often told with dramatic graphics! Molotov Cocktails, RPG-7’s and riots are interesting stuff to
watch; no matter that the event has occurred elsewhere and may be totally meaningless to you. Is
this pure drama or are these events that we should be concerned about? Or are they so unusual and
rare that we fail to comprehend the message about the risks that we face?
Communication and how we communicate is a key factor. Words by themselves are about 7%
effective as a communication tool. Words, when coupled with voice tonality raise effectiveness to
about 38%. However, the most effective way to communicate is via physiology, which gets us to
about 55% effective. Well, the next best thing to being there is being able to see what is there.
Hence the effectiveness of graphics that evoke drama, physiology and raise emotions in
communicating your message! The quote that a picture is worth a thousand words has never been so
true as it is today.
Ideas get distorted in the transmission process. We typically remember:



10% what we hear
35% what we see
65% what we see & hear
Copyright 2010, Geary W. Sikich and Logical Management Systems, Corp., all rights reserved.
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Are we seeing the emergence of more White Swan events?
Exploiting new challenges in Enterprise Risk Management
By Geary W. Sikich – Copyright© Geary W. Sikich 2010. World rights reserved. Published with permission of the author.
Yet, we typically spend:




30% speaking
9% writing
16% reading
45% listening
We live in an era of information explosion and near instantaneous availability to this information.
Driven by a media bias for the dramatic we are constantly being informed about some great calamity
that has befallen mankind somewhere in the world. The BP disaster in the Gulf of Mexico has been
eclipsed by flooding in Pakistan, which will get eclipsed by some other catastrophe.
Society is not awash with disasters! There is always another flood, riot, car bomb, murder, financial
failure just around the corner. And, there is a compelling reason for this! The societies we live in have
a lot of people! Some quick examples – China and India each have over 1 billion people. The U.S.
has 300 million people. The European Union has 450 million people. Japan has 127 million people.
These numbers alone ensure that rare events (even very low probability events) will occur regularly;
making the wildly improbable perfectly routine. This is true for countries worldwide. Population size is
not a factor – Canada has 32 million people, Australia 20 million, the Netherlands 17 million and New
Zealand 4 million. Take this to a smaller level – cities; and you find:










Tokyo, Japan - 28,025,000
Mexico City, Mexico - 18,131,000
Mumbai, India - 18,042,000
Sáo Paulo, Brazil - 17, 711,000
New York City, USA - 16,626,000
Shanghai, China - 14,173,000
Lagos, Nigeria - 13,488,000
Los Angeles, USA - 13,129,000
Calcutta, India - 12,900,000
Buenos Aires, Argentina - 12,431,000
The above may be the ten largest cities in the world; but, consider this – India has 192 cities with
populations of over 200,000 people and China has 40 cities with populations of over 2,000,000. New
York City with 8 million, London with 7.5 million, Toronto with 4.6 million and Chicago with 2.8 million
barely would be of significance in China.
With this many people around, there would appear to be a bottomless supply of rare, but dramatic
events to choose from. Does this seemingly endless parade of tragedy reflect an ever dangerous
world? Or, are the risks overestimated due to the influence of skewed images?
Taleb tells us that the effect of a single observation, event or element plays a disproportionate role in
decision-making creating estimation errors when projecting the severity of the consequences of the
event. The depth of consequence and the breadth of consequence are underestimated resulting in
surprise at the impact of the event. Theories fail most in the tails; some domains are more vulnerable
to tail events.
Copyright 2010, Geary W. Sikich and Logical Management Systems, Corp., all rights reserved.
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Are we seeing the emergence of more White Swan events?
Exploiting new challenges in Enterprise Risk Management
By Geary W. Sikich – Copyright© Geary W. Sikich 2010. World rights reserved. Published with permission of the author.
Risk, Risk Perception, Risk Reality
When we see cooling
towers, our frame of
reference generally
will go to nuclear
power plants. More
specifically, to Three
Mile Island, where
America experienced
its closest scare as a
result of a series of
errors and
misjudgments. As
you can see a cooling
tower is nothing
more than a large vent that is designed to remove heat from water (what is termed “non-contact
water) used to generate steam.
We worry about cooling towers spewing forth radioactive plumes that will cause us death – when, in
fact, this cannot happen. Yet we regularly board commercial airliners and entrust our lives to some of
the most complex machinery man has created!
Our perceptions of risk are influenced by several factors. Peter Sandman, Paul Slovic and others have
identified many factors that influence how we perceive risk. For example:
Risk Perception Factors
Acceptable
Risks perceived as:
Unacceptable
Risks perceived as:
Voluntary
Under an individual’s control
Have clear benefits
Distributed fairly
Natural
Statistical
Generated by a trusted source
Familiar
Affect adults
Being imposed
Controlled by others
Having little benefit
Unfairly distributed
Manmade
Catastrophic
Generated by an untrusted source
Exotic
Affect children
People perceive risks differently; people do not believe that all risks are of the same type, size or
importance. These influencing factors affect how we identify, analyze and communicate risk. Why is
it so important to effectively communicate risk information? Here are a few vivid examples of how
poor communication/no communication turned risk realization into brand disasters:

Firestone Tire Recall – Destroys a 100 year relationship with Ford

Exxon Valdez Oil Spill – Still getting press coverage after 20 years

Coke Belgium Contamination – Loss of trust

BP Deepwater Horizon – Enterprise Risk Management (ERM) restructured?
Many years ago, I attended a conference on risk and risk communication in Chicago in the aftermath
of the Bhopol disaster in India. Peter Sandman was one of the speakers and he left an indelible
Copyright 2010, Geary W. Sikich and Logical Management Systems, Corp., all rights reserved.
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Are we seeing the emergence of more White Swan events?
Exploiting new challenges in Enterprise Risk Management
By Geary W. Sikich – Copyright© Geary W. Sikich 2010. World rights reserved. Published with permission of the author.
imprint on my brain that has stood the test of time and the test of validation. He drew the following
equation:
RISK = HAZARD + OUTRAGE
Sandman, explained his equation as follows:
“Public perception of risk may not bear much resemblance to Risk Assessment. However,
when it comes to their accepting risk one thing is certain; perception is reality.”
Sandman concluded his presentation with the following advice regarding the six interrogatories:






WHO:
WHAT:
WHY:
WHEN:
WHERE:
HOW:
Identify internal/external audiences
Determine the degree of complexity
Work on solutions - not on finger pointing
Timing is critical
Choose your ground - know your turf
Manner, method, effectiveness
In the 20+ years since that speech in Chicago much has changed. Social Media has, will, might;
transform our lives – take your choice. While I agree that the Internet has transformed the lives of
millions; I am not convinced that it has yet displaced the traditional media sources for our news.
One issue that is yet to be resolved is “how trustworthy the source.” For example, the following story
appeared on the Internet:
US Orders Blackout Over North Korean Torpedoing Of Gulf Of Mexico Oil Rig
Source: EU TIMES – Posted on 1 May 2010
A grim report circulating in the Kremlin today written by Russia’s Northern Fleet is reporting that the
United States has ordered a complete media blackout over North Korea’s torpedoing of the giant
Deepwater Horizon oil platform owned by the World’s largest offshore drilling contractor Transocean that
was built and financed by South Korea’s Hyundai Heavy Industries Co. Ltd., that has caused great loss of
life, untold billions in economic damage to the South Korean economy, and an environmental catastrophe
to the United States.
To the reason for North Korea attacking the Deepwater Horizon, these reports say, was to present US
President Obama with an “impossible dilemma” prior to the opening of the United Nations Review
Conference of the Parties to the Treat on the Non-Proliferation of Nuclear Weapons (NPT) set to begin May
3rd in New York.
For the complete story see link:
http://www.linkedin.com/news?viewArticle=&articleID=126102399&gid=2086769&srchCat=WOTC&article
URL=http%3A%2F%2Fwww%2Eeutimes%2Enet%2F2010%2F05%2Fus-orders-blackout-over-northkorean-torpedoing-of-gulf-of-mexico-oil-rig%2F&urlhash=76of
Twittering fingers want to know! Could the story above be true? The posting received 245 comments
and a rating of 3.9 on a scale of 5 based on 204 votes. Assuming a rating of 5 equals totally
believable, the rating of 3.9 indicates that the story was believed by many – thank you social media!
Information, especially information found via social networking, social media, etc., requires significant
insight and analysis. Beyond that, confirmation of the source is critical. Can you imagine the above
story making its way into the legal proceedings under discovery?
Now in its second year, the Digital Influence Index created by the public relations firm, FleishmanHillard Inc. covers roughly 48% of the global online population, spanning France, Germany, the United
Copyright 2010, Geary W. Sikich and Logical Management Systems, Corp., all rights reserved.
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Are we seeing the emergence of more White Swan events?
Exploiting new challenges in Enterprise Risk Management
By Geary W. Sikich – Copyright© Geary W. Sikich 2010. World rights reserved. Published with permission of the author.
Kingdom, Canada, China, Japan, and the United States. With less than 50% coverage (62% of the
global online population is not reflected in the Digital Influence Index) they would have you believe
that the index is a valid indicator of the ways in which the Internet is impacting the lives of
consumers.
While BP has been an easy target for the media, it is far from clear that BP’s handling of the
Deepwater Horizon event has been as bad as portrayed. Many years ago I was provided with some
insight as I developed a crisis communications program for another major oil company. While
attending a presentation on crisis communications eight guiding principles were offered. I think that
they are still very valid today:
ACCEPT RESPONSIBILITY
LOOK LIKE YOU CARE AND MEAN IT
DON'T WORRY ABOUT BEING SUED
DO THE RIGHT THING
THINK IN TERMS OF BROAD DEFENSE
RELY ON RESEARCH
BEWARE OF EXPERTS
THERE IS NO MAGIC BULLET
So, what, hypothetically, does BP’s Scorecard look like? Is it balanced, askew, Misaligned, or just
much maligned? On a scale of 1 – 10, with 1 being dreadful and 5 being Excellent Let’s take a look at
how BP has done thus far:
The BP Media Management/Perception Scorecard
Crisis Communication Principle
Accept Responsibility
Look Like You Care and Mean It
Don’t Worry About being Sued
Do the Right Thing
Think in Terms of Broad Defense
Rely on Research
Beware of Experts
Comment
Work on solutions not on identifying who is to blame or who
is responsible. BP scores well here as they have not made it
a finger pointing issue with their partners Anadarko,
Transocean, etc.
Put a human face on things. Oops, where is Tony Hayward
when you need him – oh, yes, yachting. BP scores very low
here; although the appointment of Bob Dudley indicates that
this may turn for the better soon.
Know that you are going to be sued. Do not let legal
concerns dictate your communications policy. An aggressive
communications strategy can mute lawsuits. BP scores in
the mid-range here. I am sure that knowledge of lawsuits
forthcoming has curtailed some crisis communication efforts.
Behavior and corporate image issues. BP scores well on
their efforts to do the right thing – repeatedly stating that
they will honor all legitimate claims. However, corporate
image has been impaled – there is even a Greenpeace
sponsored redesign BP’s Logo contest.
How the crisis goes away versus how you act - or - How do
you bring your brand name back versus making the story go
away. BP’s brand has already suffered with calls for
boycotts of BP, a steep decline in stock price and a drop in
market capitalization from $130+ Billion to $84+ Billion
(down $4.6 Billion for those counting). BP also has had to
set aside $20 Billion for damages and is spending about
$100 million a day on cleanup response.
Impact of coverage. Know your audience. Empirical
research vs. Intuition and Gut Feelings. BP does not fair
well here. I believe that they really did not do a lot of
research and that they have misread the public reaction.
Who are the experts and what's in it for them. Perception Hired Gun. Beware of free advice. BP has done well here;
they have not trotted out a bunch of “experts,” rather they
have presented in-house people who address the issue in
human terms.
Copyright 2010, Geary W. Sikich and Logical Management Systems, Corp., all rights reserved.
Score 1 – 5
5
2
3
3
4
2
5
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Are we seeing the emergence of more White Swan events?
Exploiting new challenges in Enterprise Risk Management
By Geary W. Sikich – Copyright© Geary W. Sikich 2010. World rights reserved. Published with permission of the author.
There is no Magic Bullet
You need good business decision making and execution
during crisis situations. Flawed logic, bad business
decisions, failure to assess human nature correctly. So far it
appears that BP gets mixed reviews on decision making and
execution. BP let Tony Hayward stay in charge too long,
especially after the first few comments in the press. The
technology for capping the well may just not be there yet.
Operating at the depths and in the extreme conditions that
are found in one mile deep waters is a challenge; it become
more of a challenge when you have the problems that BP is
faced with. The relief wells may not be the “magic bullet”
everyone expects.
Total score 26 divide by 8 gives us a 3.25 rating overall based on this very informal
personal survey of one.
2
3.25
Management is never put more strongly to the test than in a crisis situation. The objectives are
immediate and so are the results. A crisis is an event requiring rapid decisions involving the media
that, if handled incorrectly, could damage your company's credibility and reputation.
Risk perception will influence your ERM program. Management simply must devote sufficient
resources to recognizing and understanding how operations are being viewed from a risk perspective.
With routine incidents being treated as front-page news by the media, you must be prepared to deal
with public perception, as well as reality.
Disruptive (Unsettling) by Design (with Purpose, Plan, Intent)
How can you get better at anticipating what will happen? That is the million dollar question. What do
you need to do to create an ERM program that leverages forward and creates global awareness within
your organization? You must learn to create a mosaic from diverse sources of information and diverse
elements within your enterprise. You must learn how to respond to change, disruption and
uncertainty; and how to use disruption and uncertainty to your advantage to create a business
continuity plan that is truly resilient. Disruption is transforming the way smart organizations make
decisions, keeping their business in business when faced with disruptive events. For example, here
might be a typical sequence of events:
A risk materializes or is realized (event occurs). Someone, who is perceived to have good
information and/or insight into the event or problem, makes a decision. Others observing the
first person's decision avoid further analysis/discovery and copy the earlier decision. The
more people that copy the earlier decision, the less likely any new discovery or analysis will
occur. If the earliest decision was correct, everything works out. If it was not, the error is
compounded, literally cascading throughout the organization.
Modern communications systems allow information to cascade rapidly; exacerbating the effect of a
wrong or inadequate decision. Disruption happens. Natural disasters, technology disasters, manmade
disasters happen. How would a technology breakthrough, a shift in consumer demand or a rise, or
fall, in a critical market affect the continuity of your business? Any of these can rewrite the future of a
company – or a whole industry. If you haven't faced this moment, you may soon. It's time to change
the way you think about continuity and the way you run your business.
How you decide to respond is what separates the leaders from the left behind. Today's smartest
executives know that disruption is constant and inevitable. They've learned to absorb the shockwaves
that change brings and can use that energy to transform their companies and their careers
Copyright 2010, Geary W. Sikich and Logical Management Systems, Corp., all rights reserved.
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Are we seeing the emergence of more White Swan events?
Exploiting new challenges in Enterprise Risk Management
By Geary W. Sikich – Copyright© Geary W. Sikich 2010. World rights reserved. Published with permission of the author.
Imagine that your ERM program has been implemented as it was designed. You and your organization
carried out ERM implementation following every detail contained in the policy, planning documents
and applicable protocols. Your ERM program has failed. That is all you know. Your ERM program
failed.
Now your challenge and that of your ERM team is to explain why they think that the ERM program
failed. You must determine how much contrary evidence (information) was explained away based on
the theory that the ERM program you developed will succeed if you implement the steps required to
identify and respond to risks to your business operations.
The goal of this type of exercise is to break the emotional attachment to the success of the ERM
program. When we create an ERM program we become emotionally attached to its success. By
showing the likely sources of breakdown that will impede and/or negate the ERM program (failure), we
utilize a methodology that allows us to conduct a validation of the ERM program by determining the
potential failure points that are not readily apparent in typical exercise processes.
ERM programs are based on a set of background assumptions that are made consciously and
unconsciously. Risk materializes and seemingly without warning, quickly destroys those assumptions.
The ERM program is viewed as not good and in need of complete overhaul. The collapse of
assumptions is not the only factor or prominent feature that defines failure point exercise
methodology; but it is without doubt, one of the most important.
Decision scenarios allow us to describe forces that are operating to enable the use of judgment by the
participants. The Failure Point Methodology, developed by Logical Management Systems, Corp.,
allows you to identify, define and assess the dependencies and assumptions that were made in
developing the ERM program. This methodology facilitates a non-biased and critical analysis of the
ERM program that allows planners and the ERM Team to better understand the limitations that they
may face when implementing and maintaining the program.
Developing the exercise scenario for the Failure Point Methodology is predicated on coherence,
completeness, plausibility and consistency. It is recognized at the beginning of the scenario that the
ERM program has failed. It is therefore not really necessary to create an elaborate scenario describing
catastrophic events in great detail. The participants can identify trigger points that could create a
reason for the ERM program to fail. This methodology allows for maximizing the creativity of the ERM
Team in listing why the program has failed and how to overcome the failure points that have been
identified.
This also is a good secondary method for ensuring that the ERM Team is trained on how the program
works and that they have read and digested the information contained in the program documentation.
As it is often the case that the developers are not the primary and/or secondary decision makers
within the program; and that the primary decision makers within the program often have limited input
during the creation of the program (time limited interviews, response to questionnaires, etc.).
This type of exercise immerses the participants in creative thought generation as to why the ERM
program failed. It also provides emphasis for ownership and greater participation in developing the
ERM program. Senior management and boards can benefit from periodically participating in Failure
Point exercises; one output being the creation of and discussion about thematic risk maps. As a result
of globalization, there is no such thing as a “typical” failure or a “typical” success. The benefits of
Failure Point exercises should be readily apparent. You can use the exercise process to identify the
unlikely but potentially most devastating risks your organization faces. You can build a monitoring
and assessment capability to determine if these risks are materializing. You can also build buffers that
prevent these risks from materializing and/or minimize their impact should the risk materialize.
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Are we seeing the emergence of more White Swan events?
Exploiting new challenges in Enterprise Risk Management
By Geary W. Sikich – Copyright© Geary W. Sikich 2010. World rights reserved. Published with permission of the author.
Managing “White Swans” – Dealing with Certainty
There are two areas that need to be addressed for Enterprise Risk Management programs to be
successful. Both deal with “White Swans” (certainty). The first is overcoming “False Positives” and
the second is overcoming “Activity Traps.”
A “False Positive” is created when we ask a question and get an answer that appears to answer the
question. In an article, entitled Disaster Preparedness, featured in CSO Magazine written by Jon
Surmacz August 14, 2003, it was written that:
“two-thirds (67 percent) of Fortune 1000 executives say their companies are more
prepared now than before 9/11 to access critical data in a disaster situation.”
The article continued:
“The majority, (60 percent) say they have a command team in place to maintain information
continuity operations from a remote location if a disaster occurs. Close to three quarters of
executives (71 percent) discuss disaster policies and procedures at executive-level meetings,
and 62 percent have increased their budgets for preventing loss of information
availability.”
source Harris Interactive
Better prepared? The question is for what? To access information – yes, but not to address human
capital, facilities, business operations, etc. – hence a false positive was created.
An “Activity Trap” is defined/explained thus:
“Processes and procedures are developed to achieve an objective (usually in support of a
strategic objective). Over time goals and objectives change to reflect changes in the market
and new opportunities. However, the processes and procedures continue on. Eventually,
procedures become a goal in themselves – doing an activity for the sake of the activity rather
than what it accomplishes.”
Citation: Odiorne, G., Management and the Activity Trap
To overcome the effect of “False Positives” and “Activity Traps” the following section offers some
thoughts for consideration.
12 steps to get from here to there and temper the impact of all these swans
Michael J. Kami author of the book, ‘Trigger Points: how to make decisions three times faster,’ wrote
that an increased rate of knowledge creates increased unpredictability. Stanley Davis and Christopher
Meyer, authors of the book ‘Blur: The Speed of Change in the Connected Economy,’ cite ‘speed –
connectivity – intangibles’ as key driving forces. If we take these points in the context of the black
swan as defined by Taleb we see that our increasingly complex systems (globalized economy, etc.) are
at risk. Kami outlines 12 steps in his book that provide some useful insight. How you apply them to
your enterprise can possibly lead to a greater ability to temper the impact of all these swans.
Step 1: Where Are We? Develop an External Environment Profile
Key focal point: What are the key factors in our external environment and how much
can we control them?
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Step 2: Where Are We? Develop an Internal Environment Profile
Key focal point: Build detailed snapshots of your business activities as they are at
present.
Step 3: Where Are We Going? Develop Assumptions about the Future External Environment
Key focal point: Catalog future influences systematically; know your key challenges
and threats.
Step 4: Where Can We Go? Develop a Capabilities Profile
Key focal point: What are our strengths and needs? How are we doing in our key
results and activities areas?
Step 5: Where Might We Go? Develop Future Internal Environment Assumptions
Key focal point: Build assumptions, potentials, etc. Do not build predictions or
forecasts! Assess what the future business situation might look like.
Step 6: Where Do We Want to Go? Develop Objectives
Key focal point: Create a pyramid of objectives; redefine your business; set functional
objectives.
Step 7: What Do We Have to Do? Develop a Gap Analysis Profile
Key focal point: What will be the effect of new external forces? What assumptions can
we make about future changes to our environment?
Step 8: What Could We Do? Opportunities and Problems
Key focal point: Act to fill the gaps. Conduct an opportunity-problem feasibility
analysis; risk analysis assessment; resource-requirements assessment. Build action
program proposals.
Step 9: What Should We Do? Select Strategy and Program Objectives
Key focal point: Classify strategy and program objectives; make explicit commitments;
adjust objectives.
Step 10: How Can We Do It? Implementation
Key focal point: Evaluate the impact of new programs.
Step 11: How Are We Doing? Control
Key focal point: Monitor external environment. Analyze fiscal and physical variances.
Conduct an overall assessment.
Step 12: Change What’s not Working Revise, Control, Remain Flexible
Key focal point: Revise strategy and program objectives as needed; revise explicit
commitments as needed; adjust objectives as needed.
I would add the following comments to Kami’s 12 points and the Davis, Meyer point on speed,
connectivity, and intangibles. Understanding the complexity of the event can facilitate the ability of
the organization to adapt if it can broaden its strategic approach. Within the context of complexity,
touchpoints that are not recognized create potential chaos for an enterprise and for complex systems.
Positive and negative feedback systems need to be observed/acted on promptly. The biggest single
threat to an enterprise will be staying with a previously successful business model too long and not
being able to adapt to the fluidity of situations (i.e., black swans). The failure to recognize weak
cause-and-effect linkages, small and isolated changes can have huge impacts. Complexity (ever
growing) will make the strategic challenge more urgent for strategists, planners and CEOs.
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Are we seeing the emergence of more White Swan events?
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Taleb offers the following two definitions: The first is for ‘Mediocristan’; a domain dominated by the
mediocre, with few extreme successes or failures. In Mediocristan no single observation can
meaningfully affect the aggregate. In Mediocristan the present is being described and the future
forecasted through heavy reliance on past historical information. There is a heavy dependence on
independent probabilities.
The second is for ‘Extremeistan’; a domain where the total can be conceivably impacted by a single
observation. In Extremeistan it is recognized that the most important events by far cannot be
predicted; therefore there is less dependence on theory. Extremeistan is focused on conditional
probabilities. Rare events must always be unexpected, otherwise they would not occur and they would
not be rare.
When faced with the unexpected presence of the unexpected, normality believers (Mediocristanians)
will tremble and exacerbate the downfall. Common sense dictates that reliance on the record of the
past (history) as a tool to forecast the future is not very useful. You will never be able to capture all
the variables that affect decision making. We forget that there is something new in the picture that
distorts everything so much that it makes past references useless. Put simply, today we face
asymmetric threats (black swans and white swans) that can include the use of surprise in all its
operational and strategic dimensions and the introduction of and use of products/services in ways
unplanned by your organization and the markets that you serve. Asymmetric threats (not fighting fair)
also include the prospect of an opponent designing a strategy that fundamentally alters the market
that you operate in.
Summary Points
I will offer the following summary points:
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Clearly defined rules for the world do not exist, therefore computing future risks can
only be accomplished if one knows future uncertainty
Enterprise Risk Management needs to expand to effectively identify and monitor
potential threats, hazards, risks, vulnerabilities, contingencies and their consequences
The biggest single threat to business is staying with a previously successful business
model too long and not being able to adapt to the fluidity of the situation
Current risk management techniques are asking the wrong questions precisely; and
we are getting the wrong answers precisely; the result is the creation of false positives
Risk must be viewed as an interactive combination of elements that are linked, not
solely to probability or vulnerability, but to factors that may be seemingly unrelated.
This requires that you create a risk mosaic that can be viewed and evaluated by
disciplines within the organization in order to create a product that is meaningful to
the entire organization, not just to specific disciplines with limited or narrow value.
The resulting convergence assessment allows the organization to categorize risk with
greater clarity allowing decision makers to consider multiple risk factors with potential
for convergence in the overall decision making process.
Mitigating (addressing) risk does not necessarily mean that the risk is gone; it means
that risk is assessed, quantified, valued, transformed (what does it mean to the
organization) and constantly monitored.
Unpredictability is fast becoming our new normal. Addressing unpredictability requires that we change
how Enterprise Risk Management programs operate. Rigid forecasts that cannot be changed without
reputational damage need to be put in the historical dust bin. Forecasts often times are based on a
“static” moment; frozen in time, so to speak. Often times, forecasts are based on a very complex
series of events occurring at precise moments. Assumptions on the other hand, depend on situational
analysis and the ongoing tweaking via assessment of new information. An assumption can be
changed and adjusted as new information becomes available. Assumptions are flexible and less
damaging to the reputation of the organization.
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Are we seeing the emergence of more White Swan events?
Exploiting new challenges in Enterprise Risk Management
By Geary W. Sikich – Copyright© Geary W. Sikich 2010. World rights reserved. Published with permission of the author.
Recognize too, that unpredictability can be positive or negative. For example; our increasing rate of
knowledge creates increased unpredictability due to the speed at which knowledge can create change.
Conclusion
I started this piece with a question and I will end it with a question. The question is similar to the
question at the beginning of this piece.
Question # 2: How much would you have to be paid to accept a 1/2,500 chance of
immediate death?
A few minor changes in the phrasing of the questions, changes your perception of the risk and, most
probably, your assessment of your value. You will generally place a greater value on what it takes to
accept a risk rather than on what you are willing to pay to take a risk.
You may recall the wording of the question; if not here it is again:
Question # 1: How much would you be willing to pay to eliminate a 1/2,500 chance of
immediate death?
Yet, you pay to take a risk every time you fly! And, on average, you pay $400 - $500 per flight. Daily
takeoffs and landings at O’Hare International Airport in Chicago average of 2,409 per day. Daily
takeoffs and landings at Hartsfield International Airport in Atlanta average of 2,658 per day. This
amounts to a lot of people willing to take a substantial risk – taking off and landing safely. The degree
of risk is based on the perception of the person regarding their vulnerability to the consequences of
the risk that is being posited materializing. Risk is, therefore, never absolute. Risk is set by the
receiver of the consequences.
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Are we seeing the emergence of more White Swan events?
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By Geary W. Sikich – Copyright© Geary W. Sikich 2010. World rights reserved. Published with permission of the author.
About the Author
Geary Sikich
Entrepreneur, consultant, author and business lecturer
Contact Information:
E-mail: [email protected] or [email protected]
Telephone: (219) 922-7718
Geary Sikich is a Principal with Logical Management Systems, Corp., a consulting and executive education firm with
a focus on enterprise risk management and issues analysis; the firm's web site is www.logicalmanagement.com.
Geary is also engaged in the development and financing of private placement offerings in the alternative energy
sector (biofuels, etc.), multi-media entertainment and advertising technology and food products. Geary developed
LMSCARVERtm the “Active Analysis” framework, which directly links key value drivers to operating processes and
activities. LMSCARVERtm provides a framework that enables a progressive approach to business planning, scenario
planning, performance assessment and goal setting.
Prior to founding Logical Management Systems, Corp. in 1985 Geary held a number of senior operational
management positions in a variety of industry sectors. Geary served as an
intelligence officer in the U.S. Army; responsible for the initial concept design and
testing of the U.S. Army's National Training Center and other intelligence related
activities. Geary holds a M.Ed. in Counseling and Guidance from the University of
Texas at El Paso and a B.S. in Criminology from Indiana State University.
Geary is also an Adjunct Professor at Norwich University, where he teaches
Enterprise Risk Management (ERM) and contingency planning electives in the
MSBC program, including “Value Chain” Continuity, Pandemic Planning and
Strategic Risk Management. He is presently active in Executive Education, where
he has developed and delivered courses in enterprise risk management,
contingency planning, performance management and analytics. Geary is a
frequent speaker on business continuity issues business performance
management. He is the author of over 200 published articles and four books, his
latest being “Protecting Your Business in Pandemic,” published in June 2008
(available on Amazon.com).
Geary is a frequent speaker on high profile continuity issues, having developed
and validated over 2,000 plans and conducted over 250 seminars and workshops
worldwide for over 100 clients in energy, chemical, transportation, government,
healthcare, technology, manufacturing, heavy industry, utilities, legal & insurance, banking & finance, security
services, institutions and management advisory specialty firms. Geary consults on a regular basis with companies
worldwide on business-continuity and crisis management issues.
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Are we seeing the emergence of more White Swan events?
Exploiting new challenges in Enterprise Risk Management
By Geary W. Sikich – Copyright© Geary W. Sikich 2010. World rights reserved. Published with permission of the author.
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Are we seeing the emergence of more White Swan events?
Exploiting new challenges in Enterprise Risk Management
By Geary W. Sikich – Copyright© Geary W. Sikich 2010. World rights reserved. Published with permission of the author.
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